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China Nepstar Chain Drugstore Reports Third Quarter 2011 Financial Results
Date:11/28/2011

SHENZHEN, China, Nov. 28, 2011 /PRNewswire-Asia-FirstCall/ -- China Nepstar Chain Drugstore Ltd. (NYSE: NPD) ("Nepstar" or the "Company"), the largest retail drugstore chain in China based on the number of directly operated stores, today announced its unaudited financial results for the third quarter ended September 30, 2011.

Financial HighlightsFor the quarter ended September 30, 2011:

  • Revenue increased 1.9% to RMB608.6 million (US$95.4 million), compared to revenue of RMB597.0 million in the third quarter of 2010
  • Gross margin was 47.5%, compared to 49.8% in the third quarter of 2010
  • Same store sales increased by 6.5% over the prior year's period
  • Net income was RMB1.2 million (US$0.2 million), compared to RMB10.4 million in the third quarter of 2010
  • Net cash flow from operations was RMB34.1 million (US$5.4 million), compared to RMB 38.4 million in the third quarter of 2010

  • Mr. Fuxiang Zhang, Chief Executive Officer of Nepstar, commented, "Our strategy of positioning Nepstar as a neighborhood store for one-stop pharmacy and convenience shopping is executed in the midst of highly publicized Chinese healthcare reform, which presents new dynamics of both challenges and opportunities. On the one hand, our gross margin has been facing significant downward pressure due to the price cap policies covering increasing number of pharmaceuticals in the market. On the other hand, we observe that the reform is also exerting pressure on pharmaceutical manufacturers. We see this as an opportunity to reinforce our pharmacy business, as we believe more pharmaceutical manufacturers are looking to retail channels to leverage their production capacity.

    "At Nepstar, we continue to work on introducing new products in both pharmaceutical and non-pharmaceutical categories, streamlining our operations and growing same store sales to stand the headwind of the general operational environment. During the quarter, we have established a stringent model to track and evaluate store productivity. While we have increased same store sales, we also scaled back non-performing stores, as operating costs have been steadily rising."

    Third Quarter ResultsDuring the third quarter of 2011, the Company opened 10 new stores and closed 63 stores. As of September 30, 2011, Nepstar had a total of 2,458 stores in operation.

    Revenue for the quarter increased 1.9% to RMB608.6 million (US$95.4 million), compared to revenue of RMB597.0 million for the same period in 2010. Increased sales of newly introduced convenience products continued to offset the negative impact on drug sales from ongoing healthcare reform that has led to price cuts and the diversion of patients from drugstores.

    Third quarter revenue contribution from prescription drugs was 20.7%, OTC drugs was 34.9%, nutritional supplements was 18.2%, traditional Chinese herbal products was 3.9% and convenience and other products was 22.3%. During the third quarter of 2011, the Company introduced 45 new stock keeping units (SKUs) within the convenience products category.

    Same store sales (for 2,179 stores opened before December 31, 2009) for the third quarter of 2011 increased by 6.5% compared to the same period in 2010. This growth was mainly attributable to increased sales of convenience products and other new non-pharmaceutical products introduced since the second half of 2010.

    Nepstar's portfolio of private label products included 1,856 products as of September 30, 2011. Sales of private label products represented approximately 30.9% of revenue and 43.2% of gross profit for the third quarter of 2011.

    Third quarter gross profit was RMB289.3 million (US$45.4 million), compared to RMB297.4 million in the same period of 2010. Gross profit margin in the third quarter of 2011 was 47.5%, compared to 49.8% in the same period of 2010 and 47.8% in the second quarter of 2011. The decline in gross profit margin was mainly due to price reductions on essential drugs and changes in revenue mix as the Company introduced more convenience products with lower gross profit margin. The Company continued to make efforts to provide quality private label products at reasonable prices in convenience products category. In the third quarter, private label products' contribution to the convenience products category reached 28.0%, which helped maintain a reasonably favorable gross profit margin level on sales of convenience products.

    Sales, marketing and other operating expenses as a percentage of revenue in the third quarter of 2011 increased to 42.6% compared to 41.9% in the same period of 2010. The increase was primarily due to higher rental and labor costs owing to a general inflationary economic environment.

    General and administrative expenses as a percentage of revenue in the third quarter of 2011 were 4.2%, compared to 5.5% in the same period of 2010. The lower G&A expenses were mainly due to rigorous cost control measures and reduced share based expenditures, etc.

    As a result of the factors discussed above, income from operations in the third quarter of 2011 was RMB3.0 million (US$0.5 million), compared to RMB14.5 million in the same period of 2010.

    Interest income for the third quarter of 2011 was RMB6.1 million (US$1.0 million), compared to RMB5.5 million in the same period of 2010. The increase in interest income was mainly due to an increase in interest rates by the Chinese government. Dividend income from cost method investments was RMB0.7 million (US$0.1 million) for the third quarter of 2011, compared to zero in the same quarter of 2010. Equity income of an equity method investee was a loss of RMB0.6 million (US$0.1 million), compared to a gain of RMB2.3 million in the same quarter of 2010.

    Nepstar's effective tax rate was 87.0% for the third quarter of 2011, compared to 53.2% for the same period in 2010. Other than the impact from non-deductible expenses, the high effective tax rate in the third quarter of 2011 was partially due to the valuation allowance made on deferred tax assets arising from the tax loss carryforwards of the loss-making subsidiaries. It is also due to the decreased profitability of the profitable subsidiaries, which resulted in lower consolidated income before income tax.

    Net income for the third quarter of 2011 was RMB1.2 million (US$0.2 million), which represented RMB0.01 (US$0.002) basic and diluted earnings per American Depositary Share ("ADS"). This compares to a net income of RMB10.4 million, which represented RMB0.10 basic and diluted earnings per ADS in the same period of 2010. The total number of outstanding ordinary shares of the Company as of September 30, 2011 was 204.4 million. The weighted average number of ordinary shares in the third quarter of 2011 was 206.1 million. Each ADS represents two ordinary shares of the Company.

    As of September 30, 2011, Nepstar's total cash, cash equivalents and bank deposits were RMB975.6 million (US$153.0 million) and its shareholders' equity was RMB1.35 billion (US$211.6million).

    In the third quarter of 2011, net cash flow from operations was RMB34.1 million (US$5.4 million).

    Business Outlook"We are committed to further broadening our product mix in both pharmaceutical and non-pharmaceutical categories as we are encouraged by the same store sales growth contributed by new products we added since the second half of last year. The ongoing healthcare reform brought new dynamics to our strategy. We look forward to taking advantage of the policy-driven pricing pressure to drug manufacturers and increasing our own prescription and OTC drugs coverage. In the fourth quarter, we are also reinforcing training to our floor staff to improve store productivity. Overall, we remain confident in the long-term prospects of the Company and the consumer healthcare market in China," Mr. Zhang concluded.

    Conference Call InformationThe Company will host a conference call, to be simultaneously webcasted, on Monday, November 28, 2011 at 8:00 a.m. Eastern Time / 9:00 p.m. Beijing Time. Interested parties may participate in the conference call by dialing +1-877-407-9210 (North America) or +1-201-689-8049 (International) approximately five minutes before the call start time. A live web cast of the conference call will be available on the Nepstar website at www.nepstar.cn.

    A replay of the call will be available shortly after the conclusion of the conference call through December 4, 2011 at 11:59 p.m. Eastern Time or December 5, 2011 at 12:59 p.m. Beijing Time. An archived Web cast of the conference call will be available on the Nepstar website at http://www.nepstar.cn. Interested parties may access the replay by dialing +1-877-660-6853 (North America) or +1-201-612-7415 (International) and entering account number 286 and conference ID number 382739.

    About China Nepstar Chain Drugstore Ltd.China Nepstar Chain Drugstore Ltd. (NYSE: NPD) is China's largest retail drugstore chain based on the number of directly operated stores. As of September 30, 2011, the Company had 2,458 stores across 74 cities, one headquarter distribution center and 14 regional distribution centers in China. Nepstar uses directly operated stores, centralized procurement and a network of distribution centers to provide its customers with high-quality, professional and convenient pharmacy services and a wide variety of other merchandise, including OTC drugs, nutritional supplements, herbal products, personal care products, family care products, and convenience products including consumables. Nepstar's strategy of centralized procurement, competitive pricing, customer loyalty programs and private label offerings has enabled it to capitalize on the robust economic growth in China and to take advantage of the demographic trend in China to achieve a strong brand and leading market position. For further information, please go to http://www.nepstar.cn.

    Safe Harbor StatementThis press release contains forward-looking statements. These statements constitute "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar statements. Among other things, the quotations from management in this press release and the Company's strategic operational plans and business outlook, contain forward-looking statements. Such statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Further information regarding these and other risks is included in the Company's filings with the U.S. Securities and Exchange Commission, including its annual report on Form 20-F. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

    Exchange Rate InformationThe United States dollar (US$) amounts disclosed in this press release are presented solely for the convenience of the reader. Translations of amounts from RMB into United States dollars for the convenience of the reader were calculated at the certified exchange rate of US$1.00 = RMB6.3780 on September 30, 2011 as set forth in the H.10 weekly statistical release of the Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on September 30, 2011, or at any other date. The percentages stated are calculated based on RMB amounts.

    ContactsLucia Qian
    China Nepstar Chain Drugstore Ltd.
    Vice President, IR
    Phone: +86-755-2641-4065
    Email: qianrt@nepstar.cn

    Dixon Chen
    Grayling
    Investor Relations
    Tel: +1-646-284-9403
    Email: dixon.chen@grayling.com

    Ivette Almeida
    Grayling
    Media Relations
    Tel: +1-646-284-9455
    Email: ivette.almeida@grayling.com

    Tables followChina Nepstar Chain Drugstore Ltd.Unaudited Condensed Consolidated Statements of Income(amounts in thousands – except per-share data)Three-month period endedSeptember 30,September 30,September 30,201020112011RMB

    RMB

    USDRevenue

    597,045

    608,626

    95,426Cost of goods sold

    (299,604)

    (319,340)

    (50,069)Gross profit

    297,441

    289,286

    45,357Sales, marketing and other operating expenses

    (249,990)

    (259,540)

    (40,693)General and administrative expenses

    (32,991)

    (25,752)

    (4,038)Impairment losses of property and equipment

    -

    (1,012)

    (159)Income from operations

    14,460

    2,982

    467Interest income

    5,537

    6,101

    957Dividend income from cost method investments

    -

    682

    107Equity in income of an equity method investee

    2,314

    (630)

    (99)Income before income tax expense

    22,311

    9,135

    1,432Income tax expense

    (11,875)

    (7,948)

    (1,246)Net income attributable toChina Nepstar Chain Drugstore Ltd.

    10,436

    1,187

    186Basic earnings per ordinary share

    0.050

    0.006

    0.001Basic earnings per ADS

    0.100

    0.012

    0.002Diluted earnings per ordinary share

    0.050

    0.006

    0.001Diluted earnings per ADS

    0.100

    0.012

    0.002China Nepstar Chain Drugstore Ltd.Unaudited Condensed Consolidated Balance Sheets(amounts in thousands)As ofAs ofAs ofDecember 31,September 30,September 30,201020112011RMBRMBUSDASSETSCurrent assets:Cash, cash equivalents and bank deposits

    1,139,796

    806,562

    126,460Restricted cash

    5,000

    -

    -Accounts receivable, net of allowance for doubtful accounts

    83,722

    92,579

    14,515Amounts due from related parties

    12,358

    4,218

    661Prepaid expenses, deposits and other current assets

    127,750

    122,922

    19,273Inventories

    433,265

    404,196

    63,373Deferred tax assets

    3,551

    2,201

    345Total current assets

    1,805,442

    1,432,678

    224,627Non-current assets:Bank deposits

    -

    169,000

    26,497Property and equipment, net

    192,019

    162,564

    25,488Rental deposits

    41,811

    40,354

    6,327Cost method investments

    12,638

    12,638

    1,981Equity method investment

    35,151

    35,149

    5,511Land use right

    8,227

    -

    -Intangible assets, net

    2,919

    3,176

    498Goodwill

    51,089

    51,819

    8,125Deferred tax assets

    1,813

    1,951

    306Deposits for acquisitions

    2,000

    1,000

    157Accrued interest income

    -

    1,152

    181Total non-current assets

    347,667

    478,803

    75,071TOTAL ASSETS

    2,153,109

    1,911,481

    299,698LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:Accounts payable

    313,773

    325,409

    51,021Amounts due to related parties

    24,461

    18,462

    2,895Accrued expenses and other payables

    131,330

    119,519

    18,739Deferred income

    26,102

    13,007

    2,039Income tax payable

    52,520

    56,939

    8,927Total current liabilities

    548,186

    533,336

    83,621Non-current liabilities:Deferred income

    18,794

    17,377

    2,725Deferred tax liabilities

    16,922

    10,892

    1,708Total non-current liabilities

    35,716

    28,269

    4,433Total liabilities

    583,902

    561,605

    88,054Shareholders' equity:Share capital

    164

    162

    25Treasury stock

    -

    (1,267)

    (199)Additional paid-in capital

    1,501,809

    1,264,663

    198,285Accumulated other comprehensive loss

    (41,563)

    (40,747)

    (6,389)Retained earnings

    108,797

    127,065

    19,922Total shareholders' equity

    1,569,207

    1,349,876

    211,644TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

    2,153,109

    1,911,481

    299,698
    '/>"/>

    SOURCE China Nepstar Chain Drugstore Ltd.
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    All rights reserved

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